Index Number - 7 Conversion of Chain Base to Fixed Base Index Number
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Limitations of Index Numbers
Index numbers are very useful to study economic changes. However, the following limitations of index numbers should be noted:
1. Index Number measures the changes in a certain phenomena with respect to certain period. This period is known as base year. The base year should be normal year free from abnormal events like war, famine, flood, etc.
2. Index number obtained for one purpose cannot be used for any other purpose.
3. Index number is an average measure of relative changes in a variable and hence bares the limitations of an average.
4. The selection of commodities, proper selection of average and proper weighting system play vital role in the construction of index numbers. If all these are not properly selected, index numbers do not give the correct picture of the situation.
5. With the change in time the situation also changes so the commodities selected in the base year should be reconsidered and suitable changes should be made n these commodities and their quantities.
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